Pricing analysis is essential in evaluating new product concepts,developing test marketing strategy and designing a new product introduction strategy.Pricing analysis is also important for existing products because of changes in the market and competitive environment,unsatisfactory market performance and modifications in marketing strategy over the product's life cycle.
a.Customer Price Sensitivity:
One of the challenges in pricing analysis is estimating how buyers will respond to different prices.The pricing of procter & Gamble Company's analgesic brand,Aleve,illustrates this situation.Analysis of buyers price sensitivity should answer the following questions:
1.Size of the product-market in terms of buying potential.
2.The market segments and market targeting strategy to be used.
3.Sensitivity of demand in each segment to changes in price.
4.Importance of non-price factors,such as features and performance.
5.The estimated sales at different price levels.
1.Price elasticity:
Price elasticity is the percentage change in the quantity sold of a brand when the price changes,divided by the percentage change in price.Elasticity is measured for changes in price from some specific price level so elasticity is not necessarily constant over the range of prices under consideration.
2. Non price Factors:
Factors other than price may be important in analyzing buying situations.For example,buyers may be willing to pay a premium price to gain other advantages or , instead,be willing to forgo certain advantages for lower prices.Factors other than price which may be important are quality,uniqueness,availability,convenience,service and warranty.
3.Forecasts:
Forecasts of sales are needed for the price alternatives that management is considering.In planning the introduction of Aleve,P&G's management could look at alternative sales forecasts based on different prices and other marketing program variations.
b.Cost analysis:
Cost information is essential in making pricing decisions.
1.Composition of Product Cost:
First,it is necessary to determine the fixed and variable costs involved in producing and distributing the product.Also,it is important to estimate the amount of the product cost accounted for by purchases from suppliers.It is useful to separate the costs into labor,materials and capital categories when studying cost structure.
2.Volume Effect on Cost:
The next part of cost analysis examines how costs vary at different levels of production or quantities purchased.Can economies of scale be gained over the volume range that is under consideration,given the target market and positioning strategy.
3.Competitive Advantage:
Comparing key competitors costs is often valuable.Are their costs higher,lower or about the same.Although such information may be difficult to obtain,experienced managers can often make accurate estimates.
4.Experience Effect:
It is important to consider the effect of experience on costs.Experience or learning curve analysis indicates whether costs and prices for various products decline by a given amount each time the number of units produced doubles.
5.Control Over Costs:
Finally,it is useful to consider how much influence an organization may have over its product costs in the future.To what extent can research and development,bargaining power with suppliers,process innovation and other improvements help to reduce costs over the planning horizon.
c.Competitor's responses analysis:
Each competitor's pricing strategy needs to be evaluated to determine:
1.Which firms represent the most direct competition for buyers in the market targets that are under consideration.
2.How competing firms are positioned on a relative price basis and the extent to which price is used as an active part of their marketing strategies.
3.How successful each firm's price strategy has been
4.The key competitors probable responses to alternative price strategies.
d.Pricing Objectives:
Pricing strategies are expected to achieve specific objectives.More than one pricing objective is usually involved and sometimes the objectives may conflict with each other.If so,adjustments may be needed on one of the conflicting objectives.Several examples of pricing objectives follow:
1.Gain Market Position:
Low prices may be used to gain sales and market share.Limitations include encouraging price wars and reduction of profit contributions.Even though buyers may have been responsive to a price for MACH 3 that was 45 percent about SensorExcel,Gillette's management used a 35 percent price increase that was more likely to gain market position.
2.Achieve Financial Performance:
Prices are selected to contribute to financial objectives such as profit contribution and cash flow.Prices that are too high may not be acceptable to buyers.A key objective for Dell Inc.in the consumer market segment was pricing to achieve financial performance in combination with holding market position.
3.Product Positioning:
Prices may be used to enhance product image,promote the use of the product,create awareness and positioningobjectives.The visibility of price may contribute to the effectiveness of other positioning components such as advertising.
4.Stimulate Demand:
Price is used to encourage buyers to try a new product or to purchase existing brands during periods when sales slow down.A potential problem is that buyers may balk at purchasing when prices return to normal levels.
5.Influence Competition:
The objective of pricing actions may be to influence existing or potential competitors. Management may want to discourage market entry or price cutting by current competitors.
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